Insurance for Lawyers 101

Understanding Commercial Lines

Kevin J. Connolly

Basics—Insurance

• What is insurance?– It’s a contract– One party, the Insurance Company, agrees to

“confer a pecuniary benefit”– Upon the Policyholder– Upon the occurrence of a fortuitous event– In which the Policyholder has an insurable

interest

Basics—Risk Management

• “Risks” are exposures to potential losses and are managed through a multi-phasic approach:– Recognition: you cannot manage a risk if you fail to

realize its potential to cause losses.– Prevention: an ounce of prevention is worth a pound

of cure.– Mitigation: You can’t prevent all losses, but you can

minimize the impact of a bad occurrence.– Financing: When all else fails, use other peoples’

money to pay for the loss. Gene’ corollary: use other peoples’ insurance, too. More on this later.

Basics—The Role of Insurance

• Insurance is a loss financing tool– For an agreed price, the insurance company

takes on the loss and the costs of defending against the claim.

– Lawyers do not provide advice about the amount of insurance that is needed.

– We can and do advise about two distinct functions of insurance, empowering the policyholder-client to make an informed business decision.

Basics—The Role of Insurance

• Don’t Bet the Company: Insurance can hedge against catastrophes that could put the business OUT of business.

• Help the Bottom Line: Insurance can bring predictability and regularity to handling the routine day-to-day claims that arise in any mass market business.

• Some of these situations call for advanced risk management techniques. Some of these techniques involve lawyers as observers, and others as active participants.

Preview—Advanced Topics

We will return to these topics in later courses, but you should be aware of these concepts

• Self-insurance is actually no insurance at all.• Fronting uses a primary insurance policy in which the

deductible is equal to the limit of liability.• Large Deductible Plans resemble Fronting but usually

are found in particular contexts, especially construction.• Large Deductibles go hand-in-hand with Retrospectively-

rated policies.• Captive insurance companies are owned and controlled

by the policyholder. This is an especially tax-advantaged technique

Property-Casualty Insurance

• Property-casualty is an amalgamation of many distinct “lines” of insurance.

• Insurance Lines are used by regulators to control the activities of insurance companies. They used to be integral to financial security laws that tried to firewall different parts of the insurance industry, so that a bad hurricane season would not imperil coverage for fidelity bonds on Wall Street.

• New York recognizes thirty distinct lines of insurance.

Lines of Insurance in New York• Life Insurance• Annuities• Accident and Health Insurance• Accident and Health Insurance (Not

including non-cancelable policies)• Accident and Health Insurance (Non-

cancelable policies)• Fire Insurance• Miscellaneous Property Insurance• Water Damage Insurance• Burglary and Theft Insurance• Glass Insurance• Boiler and Machinery Insurance• Elevator Insurance• Animal Insurance• Collision Insurance• Personal Injury Liability Insurance• Property Damage Liability Insurance

• Workers' Compensation and Employers' Liability Insurance

• Fidelity and Surety Insurance• Credit Insurance• Title Insurance• Motor Vehicle and Aircraft Physical Damage

Insurance• Marine and Inland Marine Insurance• Marine Protection and Indemnity Insurance• Residual Value Insurance• Mortgage Insurance• Credit Unemployment Insurance• Financial Guaranty Insurance• GAP Insurance (Subsections A thru D)• Prize Indemnification Insurance• Service Contract Reimbursement Insurance• Legal Services• Involuntary Unemployment Insurance

Property-Casualty Insurance

• Property-casualty is an industry classification.• Property insurance is a cohesive group, and

basically covers tangible items that have a definite or ascertainable location.

• Casualty Insurance means insurance that covers against ‘bangs’ that are similar to the occurrences that property insurance covers.

• Then there are a few ‘overhanging’ topics, such as surety bonds, which are considered to be part of P/C insurance even though the ‘bang’ is different.

ISO Commercial Package Policy

• This is the workhorse of the commercial insurance world.

• Combines a range of coverage in one convenient package. – Comes with a 15% premium discount as long

as there is at least one property cover and one liability cover in the package

– Can also be used to deliver a monoline policy

ISO—Insurance Services Office

• ISO is a trade organization that develops and files insurance forms

• Filing and approval of forms is one of the ways in which states regulate insurance companies

• ISO makes life easier for the insurance companies because ISO handles the filing of the forms and negotiations to get them accepted.

• ISO makes life easier for the states because they have to deal with a single filing.

• It’s even easier because for the most part, ISO files with NAIC, which then extends approval to all of the members of ISO and all of the States that are in the NAIC program.

Commercial Package Policy

• Bundle of Coverage Parts• Each coverage part looks like a distinct

insurance policy, with declarations, policy terms, endorsements.

• All of the coverage parts are tied together into a package policy with a Common Declaration that identifies the policyholder and the coverage parts and other documents.

• The first step in deciphering a CPP is to break it into its coverage parts and interline documents and keep them distinct. Fail to do so and here open the gates of hell.

Anatomy of the CPP

Property Insurance

• First Party/Third Party Dichotomy

• Property Coverage Part: CP 00 10 BPP

• Anatomy of the Coverage Part– Declaration– Coverage Form– Causes of Loss– Commercial Property Conditions– Endorsements

Anatomy of the BPP

• Declaration identifies the parties, identifies the covered location, documents the elected coverage options and enumerates the policy documents.

• Coverage Form is the bulky document that makes up most of the volume of the policy.

• Cause of Loss form is of two basic types– Stated Risk– Open Risk

Anatomy of the BPP

• Commercial Property Conditions– This often-overlooked form contains several

poison pills.

• Endorsements are like riders that are attached to tailor the policy as needed.

The Insuring Clause

• We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.

• What is “direct” physical loss of or damage to?– It’s not indirect – Roughly equivalent to proximate causation

The Insuring Clause

• Covered Property– Three broad groups

• Your Building• Your Business Personal Property• Personal Property of Others

The Insuring Clause

– Your Building• Completed Additions• Fixtures, including outdoor fixtures• Permanently-installed machinery and equipment• Personal property used to maintain and service the building

and premises– Fire extinguishing equipment

– Outdoor furniture

– Floor coverings

– Appliances for refrigeration, ventilation, cooking, dishwashing or laundering

• If not covered by other insurance– Additions under construction, alterations and repairs

– Materials, equipment, supplies used for making additions, alterations and repairs

The Insuring Clause

– Your Business Personal Property• Furniture and fixtures• Machinery and Equipment• Stock• All other personal property owned by You and used in Your

business• Labor, materials or services performed or arranged by you

on personal property of others• Your use interest as tenant in improvements and betterments• Leased personal property for which You have a contractual

obligation to insure, unless otherwise provided-for under Personal Property of Others.

The Insuring Clause

– Personal Property of Others• Property must be in the care, custody or control of

an insured party• Payment is made to the owner, not the

policyholder• Broader (and more expensive) than Legal Liability

coverage.

Excluded Property: “Land”

• Land• Water• Bridges• Roadways, walks,

patios and other paved surfaces

• Retaining walls that are not part of a building

• Bulkheads, pilings, piers, wharves and docks

• Cost of excavating, grading, backfilling and filling

• Foundations below the lowest basement

• Underground pipes, flues and drains

Excluded Property: Outdoor

• Outdoor grain, hay, straw and other crops

• Outdoor trees, shrubs and plants (unless these are stock)

• Outdoor radio and TV aerials including satellite dishes, wirings, masts and towers

• Outdoor signs unless attached to a building

• Outdoor Fences

Excluded Property: Miscellaneous

• DEMCABS– Deeds– Evidence of Debt– Money, including food stamps– Currency– Accounts– Bills– Securities and Notes, excluding lottery tickets

Excluded Property: Miscellaneous

• Vehicles, Watercraft, Aircraft (unless stock)

• Animals unless stock or boarded

• Valuable Papers and Records

• Property otherwise covered

• Airborne/Waterborne Property

• Contraband

Covered Property: The Location

• Property insurance covers things that stay in one place and don’t undergo fundamental change

• Coverage is restricted to the covered location

• Materials, equipment, supplies and temporary structures used to add, alter or repair the insured building can be off premises but within 100 feet

Amounts Payable

• Repair or Replace• Salvage• Valuation

– ACV– Replacement Cost– Valuation Disputes

• Limits of Liability• Deductible• Coinsurance

– ((Should minus Did) ÷ Should) × Loss– Alternatives

Amounts Payable

• Extensions and Additional Coverage– Debris Removal: 25% limit + $10,000 outside– Pollutant Cleanup and Removal $10,000 P.A.

sublimit (outside)– Preservation of Property (unlimited but inside)– Fire Dept. Service Charge ($1000 outside)– Increased Cost of Construction: an advanced

topic.

Amounts Payable

• Extensions– Newly-acquired or constructed property

• 30 days• Low Limits but outside the limits

– Personal Effects and Property of Others• $2500 sublimit. Outside the limits

– Valuable Papers and Records• $2500 sublimit. Outside the limits

– Outdoor Property• $1000 per occurrence/$250 per plant

– Non-owned detached trailers• If policyholder is contractually obligated to insure

Miscellaneous Loss Provisions

• Notice of Loss

• Police Report

• Safeguard against further loss

• Inventory and Inspection

• Proof of Loss

• Examination Under Oath

Covered Causes of Loss

• In the beginning, all property insurance was fire insurance. – Hostile Fire was the sole covered cause of loss– However, if a fire resulted from a non-covered cause

of loss, the insurance paid for the resulting loss IF the policyholder could show what losses resulted

• Lightning was added as a covered cause of loss in the 18th Century.

• “Supplemental Coverage” and “Extended Coverage” arrived in the 1930s in response to pressure from Inland Marine companies (who covered “all risks.”

Covered Causes of Loss

• Extended Coverage = W.C. Shaver• Vandalism and Malicious Mischief were

added in the 1940s• Many old forms call for property insurance

to cover fire, lightning, EC, VMM.• In 1986, when ISO issued the CPP, this

term was technically obsolete except for the unwillingness of the legal profession to join the 20th Century.

Covered Causes of Loss

• This kind of named-peril coverage is found in the “Basic” causes of loss form, which covers Fire, Lightning, EC, VMM, leakage from sprinklers, sinkhole collapse and volcanic action.

• ISO also offers a “Broad” causes of loss form that adds falling objects, weight of snow, ice and sleet, water damage from appliances and systems.

• Collapse of a completed building can be covered as an extension under the broad form, but it responds only if collapse is caused by the Broad Form perils, unknown decay, unknown insect damage, weight of people or personal property, weight of water on the roof or the use of defective materials or methods in constructing, remodeling or renovation.

Covered Causes of Loss

• Both the Basic and Broad forms also have excluded causes of loss.

• There are two kinds of exclusion: those that override covered causes and those that can be concurrent.

• “Absolutely” excluded are:– Ordinance or Law (but can be overcome with ICC Coverage)– Earth Movement– Governmental Action– Nuclear Hazard– Utility Services, but if the loss is caused by on-premises

casualty, there is an exception and coverage attaches– War– Water (flood)

Covered Causes of Loss

• Additional Exclusions (no anti-concurrency language)– Artificially-generated electrical current– Explosion of Steam Boilers– Mechanical Breakdown– Neglect

• Other than neglect, these exclusions can be covered with Equipment Breakdown/Boiler & Machinery insurance

Covered Causes of Loss

• Special Causes of Loss “All Risk”

• All Risk was (still is) characteristic of marine insurance

• Covers every cause of loss except those excluded.

• Special Form has a better than 90% market share

Special Form ExclusionsWeather damage to the interior of the building unless the building itself

is damagedWeather damage to property in the openSmoke, vapor and gas from agriculture or industrial operationsContinuous seepage or leakage (14 days)Collapse unless due to weight of people or propertyMaintenanceTheft, including uninstalled building materialsEmployee DishonestyVoluntary PartingUnauthorized instructionsInventory Shortages and Unexplained DisappearanceLoss of Use

Special Form Coverage Extensions

• Property in Transit– Limited causes of loss (WCShaver + Theft of

complete packages from secured storage + Collision and Upset

– Tearing Out Coverage

Optional Extensions

• Earthquake• Flood• Ordinance or Law• Utility Services• Spoilage• Radioactive Contamination• Pier & Wharf Additional Covered Causes of Loss

– Floating Ice– Collision of vessel or object

Break

CGL

• Scope of Coverage– Premises-Operations– Products and Completed Operations– A few intentional torts

• Anatomy– Declaration

• Identifies the named insured,• The Insurance Company• Limits of Liability

CGL Coverage Part Anatomy

• Coverage Form– Three basic coverages

• Bodily Injury & Property Damage• Personal and Advertising Injury• Medical Payments

– Supplementary Payments– Who is an Insured– Limits– Conditions– Definitions

CGL

• Insuring Clause– We will pay those sums that the insured becomes

legally responsible to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.

• “Comprehensive”– The Comprehensive General Liability policy was

introduced in 1941– It covered both premises-operations and

products/completed operations– Covers all locations and all operations within the

coverage territory

CGL

• Payment of Damages– The insuring clause requires that the insured

be legally obligated to pay damages.• Voluntary payments are not covered.• Fines, restitution—anything that is not money

damages—are not covered.

– The damages must result from bodily injury or property damage

– The terms of the policy must apply to the injury or damage

CGL

• Additionally, the injury or damage must result from an “occurrence”

• The injury or damage must occur in the policy territory

• Occurrence or Claims Made– Under an occurrence policy, the injury or damage

must occur during the policy period– Under a claims made policy, the claim must have first

been asserted during the policy period or an extension “tail”

CGL Anatomy

• Duty to Defend– The insuring agreement also expresses the

insurance company’s duty to defend the insured against any suit seeking covered damages

– Duty to defend is broader than the duty to indemnify

– Equity suits are not covered unless joined with an action for damages

CGL

• Supplementary Payments– Covers investigatory expense– Cover defense costs– Miscellaneous coverages include cost of

bonds to release attachments up to the limit of insurance, prejudgment interest on the part that the insurance company pays, postjudgment interest on the entire judgment until the insurance company pays or offers to pay up to the limits of coverage

CGL

• Who is an insured?

CGL

• Limits of Liability